What is IC-DISC?
An IC-DISC (Interest Charged Domestic International Sales Corporation) is a non-taxable C-Corporation that can be utilized by exporters to lower their tax liability. Congress established the DISC in 1971 as an export incentive for domestic manufacturers. In 1984, the DISC came under scrutiny as several foreign countries asserted that the DISC represented an illegal export subsidy. In response, the United States implemented a new caveat: any undistributed funds left accumulated in the DISC for more than a year would have interest assessed. Thus, the “Interest Charged” aspect of the IC-DISC was born.
The way the IC-DISC benefit is realized is simple; the “Supplier” (i.e., the parent company or manufacturer) may decrease their taxable income by paying a commission to the IC-DISC. The IC-DISC then receives the commission income, which is not taxed at the Federal level, and is then able to pay out a qualified dividend to the shareholders, essentially reclassifying the income as Qualified Dividend Income, which is taxed at the appropriate qualified dividend tax rate.
One frequently asked question is, “What exactly does the IRS consider a qualified Export?” The IRS provides several essential criteria for an export sale to be qualified.
They are as follows:
- The property sold must have been manufactured or assembled in the United States.
- The export property must be held for final sale, consumption, or use outside the United States. Sales to United States territories, such as Puerto Rico, would not qualify.
- No more than 50% of the property’s Fair Market Value can consist of foreign content.
Should all three of these criteria remain true, the export sale would be qualified, and a portion of it may be allocable to an IC-DISC commission.
The IC-DISC commission is primarily based on the amount of Qualified Export Sales the supplier made during the tax year, the most common methods calculation being either 4% of the Gross Export Sales, and 50% of the Net Income realized on Export Sales.
McGuire Sponsel goes above and beyond in this regard; our base services include a transaction-by-transaction analysis where we review every individual export sale for the year, and the most beneficial method is applied to each, maximizing the commission realized.
Contact our Global Business Services team to learn more about what benefits an IC-DISC could bring to your organization.
Josh Riker, is a Consultant in the firm’s Global Business Services practice and is responsible for assisting clients and adding depth in all areas of the firm’s international tax consulting services including preparing client calculations, international forms, IC-DISC tax returns, and transfer pricing documentation.